Sandstorm Gold Buys Royalty Package from Teck Resources
Sandstorm Gold (NYSEMKT:SAND) investors who thought the company might be finished doing new deals following its latest $152 million stream transaction with Yamana Gold (NYSE:AUY) were wrong. On Tuesday, Sandstorm announced that it has purchased 56 new royalties from Teck Resources (TCK) in exchange for $22 million. First, I'll give the highlights of this deal, before going into a deeper analysis.
Following the Yamana Gold deal, Sandstorm was left with $110 million in debt and about $15 million in cash. To continue growing its business and make this new deal, Sandstorm paid just $1.4 million in cash, and has issued a total of 8,365,863 Common Shares priced at C$3.57 per share. The shares were already issued to complete the deal. This is quite significant, because shares currently trade at just C$2.94, compared to the price of C$3.57 paid to Teck (price was based on the ten (10) day volume weighted average price of the Company's Common Shares traded on the Toronto Stock Exchange).
So, what is Sandstorm getting for its money? It has acquired 56 royalties - 33 on projects in North America, 9 on projects in South America, 3 on projects in Europe and 11 on projects in Asia. Four of these royalties are currently producing, with 9 in the development stage, 8 in the advanced exploration stage, and 35 in the exploration stage.
These royalties come with strong counterparties, such as Glencore, Kinross Gold (NYSE:KGC), Newmont Mining (NYSE:NEM), Barrick Gold (NYSE:ABX), New Gold (NYSEMKT:NGD) and Alamos Gold (NYSE:AGI); these are larger companies and not microcap explorers, which certainly lowers Sandstorm's risk.
(Credit: Sandstorm Gold Presentation)
Sandstorm says there are 7 key assets to this deal. The first is a 5% net smelter returns royalty on the producing Copper Mountain mine in Canada, owned and operated by Copper Mountain Mining. It contains a massive resource base made up of copper, silver and gold, and is estimated to produce $1 million in annual cash flow to Sandstorm.
Other key producing assets acquired include: a 5% gross returns royalty on the Sheerness coal mine, owned by Westmoreland Coal (NASDAQ:WLB), a 1.25% NSR on the Magmont mine owned by The Doe Run Resources Corporation (which is the largest lead producer in North America), and a 1.5% NSR on the Altintepe project, owned by a Turkish company.
One of the most interesting assets in this deal is a 2% NSR on the advanced-exploration Hot Maden project, owned by Mariana Resources. Recent drill results show massive copper and gold intersections, with results including 103 metres of 9 g/t gold and 2.2% copper and 82 metres of 20.4 g/t gold and 1.9% copper. The resource already contains an ultra high grade component of 967,000 gold indicated ounces at 29.2 g/t and 379,000 gold inferred ounces at 36.2 g/t. This could be a massive mine that adds millions in annual cash flow to Sandstorm over time.
Another asset that gives Sandstorm long-term optionality to metals prices and exploration upside is a 2% NSR on the development stage Hackett River project, owned by Glencore plc. Once in production, it should produce 25 million pounds of copper, 8.5 million ounces of silver and 14,000 ounces of gold annually, plus 230 million pounds of zinc and 35 million pounds of lead. While this asset is still at least several years away from production, Sandstorm says that royalty cash flow would amount to $8 million per year.
Finally, I'd like to briefly mention the Lobo-Marte project, owned by Kinross Gold. Sandstorm now owns a 1.75% NSR that is capped at $40 million. This copper/gold project in Chile is estimated to produce 350,000 ounces of gold annually.
Now, there are clearly a bunch more assets included in this deal, but it would take too long to discuss each one individually. Some of these assets have little to no chance of getting to production anytime soon. However, these royalties do give Sandstorm long-term upside to rising metals prices, as well as the exploration upside that comes with owning a royalty.
At first glance, this may not look like the best deal to investors, because it doesn't really pay off big in the short-term. After all, $2 million in annual cash flow is small returns for a $22 million investment, and the royalty on Westmoreland Coal's Sheerness coal mine could be at risk of shutting down if coal prices do not recover soon.
However, I really like this deal because of how big the payoff could be over time, and because it diversifies Sandstorm's asset base. With the potential to add over $10-$15 million in cash flow per year, it is possible Sandstorm could earn several times its $22 million investment, especially if metals prices recover over the next few years. And if just one or two of the exploration-stage royalties "strikes gold" and turns into a producing mine, well, the returns could be even better.
Despite this deal and despite gold prices showing strength here at $1,087 per ounce, gold stocks are down Tuesday and so is Sandstorm, as shares currently trade at just $2 per share in the U.S. I urge long-term investors to consider starting a new position in Sandstorm or add to an existing position here on weakness. Sandstorm is a far more diverse, mature streaming and royalty company than it was a year ago or even six months ago, and shares are significantly undervalued here in my view.
Disclosure: I am/we are long SAND.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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